Behind the scenes: Oracle's pursuit of Siebel

While battling to acquire PeopleSoft, Oracle was in merger talks with Siebel Systems, according to a new SEC filing.

Tech Industry
In the midst of a hostile takeover battle for PeopleSoft, database giant Oracle also was laying the groundwork for its eventual acquisition of Siebel Systems.

According to a proxy filing this week with the U.S. Securities and Exchange Commission, Oracle and Siebel were quietly discussing a potential merger in November 2003, about five months after Oracle made a hostile bid for PeopleSoft.

And while much of the enterprise software industry was focused on the publicly acrimonious PeopleSoft acquisition, the talks between Oracle and Siebel were not without their own back-room intrigue. Over the course of a two-year period, Oracle in June of 2005 dangled a potential buyout range of $11 to $12.60 a share, only to ultimately stand firm at $10.66 a share when an agreement was announced in September.

Siebel's serious search for a suitor began in June 2003, when it formed the "Perseus Group," a collection of outside legal and financial advisors, to find it a buyer or a strategic alliance.

Oracle and Siebel, which had held casual discussions in the past about a potential merger, according to the SEC filing, entered into more formal talks in November 2003. Several days before Thanksgiving, Siebel's chief financial officer, its chief technology officer and an executive vice president met with Charles Phillips--then Oracle's executive vice president of strategy partnerships and business development--to sign a nondisclosure agreement and discuss a merger.

"Ultimately, Oracle and Siebel Systems elected not to pursue such discussions, since Oracle was then pursuing the acquisition of PeopleSoft," according to the SEC filing. "From time to time following the November 2003 meeting, representatives of the two companies...contacted each other to discuss whether the parties should explore a business combination."

As previously reported, Oracle CEO Larry Ellison noted in a 2004 videotaped deposition that Siebel's founder, Tom Siebel, had approached him about selling his company. That deposition was part of the Department of Justice's antitrust case against Oracle over its merger plans with PeopleSoft.

And this spring, when Siebel ousted its chief executive, Mike Lawrie, appointing board member George Shaheen to replace him, executive recruiters rightly speculated that such a move is usually done as a short-term measure when a company is on the block.

Circa Shaheen's appointment, Siebel entered buyout talks with two private-investment partnerships. Ultimately, however, those talks collapsed when the potential buyers determined that Siebel wanted more than they were willing to pay.

Oracle enters, stage left
Following Siebel's annual shareholders meeting in June, Oracle's co-presidents, Phillips and Safra Catz, contacted Siebel. They discussed the possibility of a merger price of about $11 a share in cash or a combination of Oracle stock and cash.

"Mr. Siebel stated that in light of the fact that Siebel Systems' market price was then approximately $9 per share, he felt that the Siebel Systems board of directors would be more receptive to a higher per-share price," the SEC filing states. "Mr. Phillips and Ms. Catz contacted Mr. Siebel later that day, indicating that Oracle might be willing to pay a price in the range of $11 to $12.60 per share, subject to further business and financial analysis, and due diligence."

Two days later, Siebel discussed Oracle's proposal with James Gaither, a Siebel board member and a Perseus member, as well as Goldman Sachs, its investment bank, and Cooley Godward, its outside legal adviser. On June 15, Oracle and Siebel signed a nondisclosure agreement.

For the next two weeks, Oracle conducted an extensive review of Siebel's financials and operations, and toward the end of June, it noted that it was not willing to consider the high end of its buyout range. Oracle also noted that it wasn't prepared to enter into negotiations and wanted more time to conduct its due diligence.

"On July 5...Mr. Siebel updated the committee members on the status and timing of the potential transaction with Oracle. After discussion, the executive committee determined that in the absence of active negotiations, Siebel Systems should terminate discussions with Oracle," according to the SEC filing. The next day, Siebel's attorneys asked Oracle to return the confidential documents it had received under the nondisclosure agreement.

Waiting it out

The following day, Siebel issued a preliminary warning that its revenues for the June quarter would fall below analysts' estimates. That sent Siebel's stock down to $8.59 a share.

A month later, in early August, Phillips called Siebel's founder to resume merger talks and discussed a buyout price of $11 a share.

Siebel's board on Aug. 14 gave its approval to proceed with merger talks and signed off on a tentative draft of the deal that called for $11 per share. Oracle resumed its evaluation of Siebel's financials and operations as part of its due diligence.

But by Aug. 28, Siebel's patience was wearing thin.

"Mr. Siebel and Mr. Phillips discussed the timing and structure of the proposed transaction. Mr. Siebel informed Mr. Phillips that while limited due diligence could continue, Siebel Systems would not engage in further negotiations until Oracle confirmed a deal price and structure, and provided Siebel Systems with a draft definitive agreement reflecting price and structure and a target announcement date," according to the SEC filing.

A week later, Oracle came up with a price, but it wasn't well-received.

"Mr. Phillips informed Mr. Siebel that...Oracle was reducing its proposal to $10.50 per share, to be paid only in cash," the SEC filing shows.

Siebel's executive committee balked at the price and called off merger talks. Siebel's founder, however, extended a compromise.

"On September 9...Mr. Siebel had separate conversations with Larry Ellison...and Mr. Phillips regarding a proposed transaction at $10.75 per share, to be paid in cash or Oracle stock," according to the SEC filing.

Phillips countered with $10.70 a share. Siebel's board of directors wanted to stay at $10.75 a share.

But in a marathon session on Sept. 11, the price gap widened.

"The parties and their advisers engaged in a number of discussions regarding valuation, with Oracle proposing a range of prices over the course of the conversations, as low as $10.35 per share," according to the SEC filing. "Mr. Phillips indicated that the price reductions were the product of, among other things, Oracle's continued financial analysis and due diligence investigation."

The last price proposed by Oracle prior to the special meeting of Siebel's board that afternoon was $10.65 per share. Siebel's board, however, authorized proceeding with merger discussions at $10.67 per share.

After Siebel's board meeting adjourned, the parties and their advisers continued to engage in price negotiations, and Phillips proposed a price of $10.66 per share.

Siebel's founder updated the company's directors on the status of negotiations, with Goldman Sachs issuing a written opinion that $10.66 a share was "fair" to Siebel's stockholders.

And in the early-morning hours on Sept. 12, Oracle and Siebel signed off on the acquisition--marking yet another megadeal for the database and applications vendor. Oracle expects the deal to close early next year, pending shareholder and regulatory approvals.

Representatives from Oracle and Siebel were not immediately available for comment.

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